Question

In spending all his income on beer and pizza, Fred finds that the marginal utility of the last pizza he consumed is 8, and the marginal utility of the last bottle of beer is 4. The price of a bottle of beer is $1.50. If Fred has maximized his utility, the price of pizza must be:________.

A. S0.75
B. $1.00
C. $3.00
D. $4.50 98.

Answer 1

C) $3.00

Step-by-step explanation:

Utility Maximization can be mathematically illustrated as Marginal Utility of product X ÷ price of product X = Marginal Utility of product Y ÷ price of product Y. Utility maximization involves maximizing utility according to one's income. Here, the products are beer and pizza. The marginal utility of pizza is 8 and its price is unknown which we will assume as "a" while the marginal utility of beer is 4 and its price is $1.50. Using our formula, we replaced the words with figures hence, 4 ÷ $1.50 = 8 ÷ a. We crossmultiply the figures are left with 4a = $12.00. A is then, $1.200 ÷ 4 = $3.00. Therefore, the price of pizza is $3.00

Answer 2

C) $3.00

Step-by-step explanation:

since Fred has been able to maximize his utility by consuming both pizza and beer, the marginal utility per dollar of pizza and beer must be equal.

The price of a bottle of beer is $1.50 and Fred obtains 4 utils from consuming it. If the marginal utility of pizza is 8 units, it is equivalent to 2 beers. So the price of pizza must equal $1.50 x 2 = $3